Is It Already Time to Amend Your 2019 Return?

Government money deposited directly in checking accounts. Forgivable loans. Refundable tax credits for keeping employees on the payroll. These things are all big deals, and they are justifiably the parts of the COVID-19 relief that have gotten the biggest buzz.

Yet some less glamorous coronavirus relief provisions can provide much-needed cash flow for your business, and they don’t require going through a lender or retaining all your workforce. They only require amending a tax return, or, perhaps, filing one.

Net operating loss relief.

The 2017 Tax Cuts and Jobs Act changed rules for net operating losses, which for most purposes can be understood as business losses. The CARES Act temporarily undoes these changes—retroactively.

Net operating losses generated in 2018, 2019 and 2020 may now be carried back five years to offset prior-year income. Before the recent CARES Act change, these losses could only be carried forward. In addition, these losses may fully offset taxable income in the carryback years, whereas the carryforwards were limited to 80% of income. Some implications:

Taxpayers who had losses in 2018 that were required to be carried forward to 2019 can now carry back those losses and get refunds from income years going back to 2013.

Taxpayers with 2019 losses can now claim refunds from income years going back to 2014.

Corporations that have 2019 income tax due on the new extended return due date of July 15 may be able to file Form 1138 to avoid paying the tax if they expect 2020 losses to be carried back to wipe out 2019 income.

Individual loss relief.

The Tax Cuts and Jobs Act imposed an arbitrary annual limit on individual business losses starting in 2018. Business losses in excess of $250,000 ($500,000 on joint returns) were disallowed and carried forward. The CARES Act retroactively delays this provision to 2020. As most businesses report their income — and loss — via Form 1040 (think S corporations and limited liability companies), this change could affect many businesses.

Individuals whose losses were limited in 2018 can now amend those filings and get additional refunds for 2018. If those losses are enough to generate a net operating loss on the 2018 Form 1040 itself, then those new 2018 losses are now eligible for the new five-year carryback. Plus, the same thing could happen on 2019 1040s.

Increased interest deduction.

The 2017 tax changes limited deductions for business interest for many taxpayers. In very rough terms, the limit was 30% of EBITDA (earnings before interest, income taxes, depreciation and amortization). The CARES Act increases the 30% limit to 50%, but only for 2019 and 2020. For businesses that have already filed a 2019 return, amended returns may be in order.

Building improvements.

The 2017 tax act was supposed to improve the ability to deduct depreciation for business nonstructural building improvements. The committee reports for the 2017 legislation explained how these improvements would get a 15-year depreciable life, making them eligible for optional 100% bonus depreciation. However, a drafting blunder left this depreciation change out of the actual legislation. As a result, such expenditures since 2017 have been capitalized and depreciated straight-line over 39 years.

The CARES Act retroactively fixes this. Taxpayers who haven’t yet filed for 2019 may still amend their 2018 return to possibly generate tax refunds. Other taxpayers may need to make an accounting method change. For a business that has done any sort of remodeling, this change is likely to generate substantial additional deductions. Your tax pro can help determine if this is the right move for you.

While these provisions aren’t as sexy as forgivable loans or rebates, for many taxpayers they will free up cash that will help keep the doors open.

Visit the Eide Bailly coronavirus resource page or ebtaxblog.com for more on the CARES Act and the latest developments in coronavirus tax news.